Question

1. A. Suppose we have two goods. The price of good 1 is 10 and the price of good 2 is 15. The income is 30. Construct a diagram with the quantities on X- and Y-axes and draw a budget line in the diagram. B. How do the prices and the income affect the shape of the graph? What happens if the price of one good rises? What happens if income increases? C. Define the Law of Diminishing Marginal Utility and provide examples to explain it. 2. A. Briefly, state the interrelationships between Economics and Law. B. Explain the difference between GDP and GNP. If the residents of Oman generate as much production in the rest of the world as the rest of the world produces in Oman, what should be true about Oman GDP and GNP? C. Explain why economists invoke the concept of ceteris paribus assumption when they examine economic relationships. Give one example. 3. A. What is externality? Explain negative and positive externalities using one appropriate example for each. B. Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency? C. Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency? 4. One of the scarce resources that constraint our behavior is time. Each of us has only 24 hours in a day. How do you go about allocating your time in a given day among competing alternatives? How do you go about weighing the alternatives? Once you choose a most important use of time, why do you not spend all your time on it? Use the notion of opportunity cost in your answer.

Answer 1

Sol 1 :

a) Price of good- 1 is 10

Price of Good - 2 is 15

And , Income = 30

So, with the given income, 3 units of Good 1 is consumed with 0 units of good 2 or 2 units of good 2 is consumed with 0 units of good 1

So, budget line will be as follows :

(b) Budget line is the line showing the possible combination of two goods that can be purchased with the given income and prices of the goods.

So, change in income and price will have the following effect

(i) Price effect : If the prices of the good 1 decreases , then there will be lateral shift in the budget line to the right because real income of the consumer increases as , now more number of goods can be purchased. And in case of increase in prices then there will be lateral shift to the left.

Further , if there is change in the prices of both the goods simultaneously. In case , if prices increases , budget line shift to the left and if price decreases , budget line will shift to the right.

(ii) Income Effect : If the income of the consumer increases , it will shift the budget line to the right because consumer will be able to buy more number of goods. And in case where income decreases , budget line will shift to the left.

c) Law of diminishing Marginal Utility states that Marginal Utility deriving from each successive units tends to decreases when more and more number of units is consumed.

y tve (apun Adam > point of Satwetin Quantity MU Cunits -ve Y'

For example : A person Consumes one pcs of burger will get greater satisfaction from it than from the consuming of second units of burger.